Canada-United States Law Journal Volume 25 Issue Article 53 January 1999 Technological Change--Its Cross-Border Impact in Terms of Corporate Structures, Branches, Mergers, and Strategic Alliances Clive V. Allen Follow this and additional works at: https://scholarlycommons.law.case.edu/cuslj Part of the Transnational Law Commons Recommended Citation Clive V. Allen, Technological Change--Its Cross-Border Impact in Terms of Corporate Structures, Branches, Mergers, and Strategic Alliances, 25 Can.-U.S. L.J. 405 (1999) Available at: https://scholarlycommons.law.case.edu/cuslj/vol25/iss/53 This Speech is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons. It has been accepted for inclusion in Canada-United States Law Journal by an authorized administrator of Case Western Reserve University School of Law Scholarly Commons. TECHNOLOGICAL CHANGE - ITS CROSS-BORDER IMPACT IN TERMS OF CORPORATE STRUCTURES, BRANCHES, MERGERS, AND STRATEGIC ALLIANCES Clive V. Allen* As we approach -the beginning of the new millennium, we have come to recognize in a very tangible way that the world and everything within it is rapidly changing. The changes are not prompted by the end of one year and the beginning of the next, or the end of one century and the beginning of the next, but by the tremendous evolution of technology which has really only happened within our lifetimes. The development of civilization as we know it has been evolutionary and relatively slow until recent years. Of course, there have been remarkable developments in science and medicine in previous times and certainly relative to the wisdom of the period. One only has to look at tle theories of Pythagoras, the laws of gravity, the determination of the Earth's rotation around the sun, or the understanding of the human circula- tory system to understand that the world has always been in a learning mode and that great people throughout the ages have discovered remarkable things. What marks the twentieth century is the rapidity with which develop- ments have occurred on so many fronts, not sequentially as in days of yore, but concurrently. Within the lifetime of all the people here today, two areas of particular significance have developed: semiconductors, based on the tran- sistor developed by scientists at Bell Labs, providing for the miniaturization of so many devices; and software providing the thinking for many of these devices. I single out these developments not because, as in days gone by, they would have been the sole achievement of the period, but because of the enormous impetus that they have provided to so many other developments that have taken place, if not concurrently at least shortly thereafter. Such technological change, as we have experienced it in recent times, has a pro- found effect on the world around us. I want to use this as an introduction into a reasonably personal discussion of what we at Northern Telecom, or Nortel Networks as we now call our- selves, have had to recognize as an important change in our business dictated by changing technologies. * Clive V. Allen is Executive Vice President, Law at Nortel Networks. He received his B.A. from McGill University and a Bachelor of Civil Law degree from that same institution. 405 CANADA-UNITED STATES LAW JOURNAL [Vol. 25:405 1999] Nortel is a business that had its origins in the 1880s when it started to de- velop primitive telephone equipment as a division of Canada's first telephone operating company. Beginning with those early days, and obviously inspired by the invention of the telephone by Alexander Graham Bell, we manufac- tured for the Canadian market a wide range of products for telephone oper- ating companies, from telephone sets in their simplest and most primitive form, through to the early and relatively basic switching systems that con- nected telephone lines. It may be difficult for us to realize today that tele- phones were not always able to provide the private links that we have known during our lifetime. In the early days of telephony, telephones were all manually linked by telephone operators. In 1889, a Kansas City undertaker, Holomon Brown Strowager, found that as telephones began to be used more, his funeral parlor seemed to be losing business to a competitor. Convinced that the telephone operators were monitoring telephone conversations and providing leads to his competitor, he developed a switching system to connect the telephone automatically so as to reduce or even eliminate the role of the operator. That development clearly revolutionized voice communications and assisted in the establishment of an industry which has grown to serve 800 million subscribers throughout the world today. Nortel, I am pleased to say, has been one of the prime benefici- aries of that development, so that over the last hundred or so years we have evolved from a small and geographically limited supplier of telephone equipment into a company with sales in 150 countries, revenues approaching twenty billion dollars, and in excess of seventy-five thousand employees around the world, one quarter of them engaged in research and development activities designed to maintain the evolution of what is now not only voice communications but data communications as well.1 But to put the subject into proper perspective, move away from the past, and look more at the present; last year Nortel made one of the most dramatic changes in its hundred-year history. For the better part of one hundred years, voice communication has been connected from one subscriber to another, from one geographical region to another, by switches which, while this cen- tury far more advanced and infinitely more capable and efficient switches than the Strowager switch, have been structured to facilitate voice communi- cations at their optimum. But in the last few years, there has been a dramatic growth in data transmission, so much so that, while five years ago voice traf- fic may have represented over ninety percent of the traffic on communication lines, we have now reached a fifty-fifty split between voice and data traffic in 1 See Nortel, About Us, Corporate& Investor Information, available at <http:llwww. nortelnetworks.com/corporate/> (visited July 19, 1999). Allen-CROSS-BORDER IMPACT OF TECHNOLOGICAL CHANGE the United States, and data traffic is growing ten times faster than voice.2 At this rate, data will provide nearly eighty percent of network traffic by next year. Some authorities believe that by the year 2005, seventy percent of the traffic will be data, leaving approximately thirty percent voice. In our 1998 annual report we note, in rather terse and legalistic language, the following: Nortel Networks expects that data communications traffic will grow substantially in the future compared to the modest growth expected for voice traffic. The growth of data traffic is expected to have a sig- nificant impact on traditional voice networks and create market dis- continuities which will drive the convergence of data and telephony and give rise to the demand for IP-optimized networks. [IP, as you know, stands for Internet protocol.] Many of Nortel Networks' tradi- tional customers have already begun to invest in data networking. In order to position Nortel Networks to take advantage of the antici- pated growth in demand for IP-optimized network equipment, Nortel Networks has made a number of strategic acquisitions, including the acquisition of Bay Networks. Acquisitions, particularly an acquisi- tion the size of the Bay Networks acquisition, involve significant risks and uncertainties. These risks and uncertainties include the risk that the industry does not evolve as anticipated and that the tech- nologies acquired do not prove to be those needed to be successful in the industry, the difficulty in integrating new businesses and opera- tions in an efficient and effective manner, the risks of customers of Nortel Networks or the acquired businesses deferring purchase deci- sions as they evaluate the impact of the acquisition on Nortel Net- works' future product strategy, the potential loss of key employees of the acquired businesses, the risk of diverting the attention of senior management from the operation of the business, and the risks of en- tering new markets in which Nortel Networks has limited experi- ence. 2 See Nortel (Northern Telecom) and Nortel DASA Demonstrate Focus on Webtone at CEBIT '98, Press Release, Mar. 18, 1998 (visited July 19, 1999) <http://releases.twoten.press. netlreleasesldate/1998/03/18TECHNOLOGY-CebitWebtone.html> (containing remarks of Nortel President J.A. (Ian) Craig regarding the growth of data traffic versus voice traffic). 3 See Kimberly Caisse, Nortel CEO: Wireless Data is Next Frontier, CONSUMER RESELLER NEWS, Oct. 22, 1998 (visited July 19, 1999) <http:/planetit.comltechcenters/docs/ Networking/News/PIT19981027S0012>. CANADA-UNITED STATES LAW JOURNAL [Vol. 25:405 1999] The markets for Nortel Networks' products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions, and short product life cycles. Nortel Net- works' success is expected to depend, in substantial part, on the timely and successful introduction of new products and upgrades of current products to comply with emerging industry standards and to address competing technological and product developments carried out by others. The development of new, technologically advanced products, including IP-optimized network products, is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. The success of new or enhanced products, including IP-optimized network prod- ucts, is dependent on a number of other factors including the timely introduction of such products, market acceptance of new technolo- gies and industry standards, and the pricing and marketing of such products .4 There in the language of the annual report is something that indicates the impact of these technological changes on our company.